February 11, 2009

China’s economy worse than government figures suggest, experts say

BEIJING

Plunging exports. Factory closures. More than 20 million people thrown out of work. Official data showing that China’s economy is cooling but still growing strongly obscure what economists say is a sharp recent decline that has inflicted obvious pain.

What is happening matters far beyond China. Whether the third-largest economy is stalling or still growing could affect how quickly the world recovers. A stagnant China would mean less demand for industrial materials and consumer goods from the United States and others.

The difference lies in the way growth is measured. Beijing uses a method that compares growth in one quarter with a full year earlier and says its economy expanded by a healthy 6.8 percent in the final quarter of 2008.

But experts say that compared to the previous three months — the system used by most other major countries — China’s growth fell to as low as one per cent or possibly zero.

“The recent weakness is much worse than the long-term trend,” said JP Morgan economist Frank F.X. Gong. Merrill Lynch economist Ting Lu said fourth-quarter growth from the previous three months was “close to zero.”

The lower quarter-on-quarter growth figure would be in line with other indicators that show exports and manufacturing falling and weakness in investment and consumer spending.

The pain is evident on factory floors and in empty restaurants and shops.

Sales at the Laiwu Sheng Yuan Building Materials Co. have plunged 50 per cent from a year earlier, said general manager Wang Jian. He said construction companies are in such bad shape he is reluctant to fill orders.

“I’m afraid they won’t be able to pay,” said Wang, whose company in the eastern city of Laiwu has 100 employees. “Builders already owe me more than 200 million yuan (US$29 million), and I don’t know when I’m going to get it back.”

Other Asian economies such as Japan and South Korea are contracting, which would make Chinese growth of even one per cent encouraging. Beijing says there are signs its four trillion yuan ($586 billion) stimulus launched in November is taking effect.

A key indicator of manufacturing improved in January, suggesting the slump might be reaching its bottom. But the purchasing managers index of the China Federation of Logistics and Purchasing said manufacturing still contracted.

“Despite the sunny headline figure, we believe it signals not a recovery, but rather continued weakness,” Standard Chartered economist Stephen Green said in a report. “Less bad news is not the same as good news.”

Other countries such as the United States and Japan report gross domestic product growth by comparing each quarter with the previous quarter. That requires more number-crunching to adjust for seasonal differences but quickly reveals changes in performance.

The gap in measurement is well known to private sector economists, who try to estimate China’s quarter-on-quarter growth based on skimpy government data.

Fourth-quarter growth compared with the previous three months fell to one per cent at an annual pace, down from four per cent the previous quarter, according to Green.

“We sharply decelerated in November and December,” he said. “There are no clear signals we have accelerated.”

JP Morgan gave an estimate of 1.5 per cent quarter-on-quarter annualized growth. But its figures also highlight a sharp decline: That rate is just one-tenth of the 15 per cent quarter-on-quarter growth the bank says China achieved in early 2007.

Exporters and China’s trade-driven southeast coast have been hit hardest but weakness has spread to other regions and industries such as real estate and auto sales.

Associated Press

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